A tax expert’s take on illegal political activity by tax-exempt organizations

October 6, 2010

I love it when the tax stars align.

Yesterday I noted that some political watchdog groups and the head of the Senate's tax-writing committee have asked the IRS to look into whether tax-exempt groups are illegally engaging in political activities.

Then today, TaxProf points me to Election Law @ Mortiz, where Donald Tobin, senior fellow for election law at Moritz College of Law at Ohio State University, examines whether these tax-exempt groups are as clever as they seem.

These Section 501(c)(4) organizations are, according to the section of the Internal Revenue Code that gives them their name, "social welfare organizations." Donations to such groups are not tax deductible (and are likely subject to gift tax), says Tobin, but income generated by the organization related to its exempt-purpose is not taxed.

Donors, especially those who make large financial gifts, find 501(c)(4) groups attractive because in most cases the organizations don't have to disclose donations.

That anonymity makes them "the perfect advocacy organization for independent third parties seeking to influence elections; they can take unlimited donations and do not have to disclose the names of donors," says Tobin.

If 501(c)(4) organizations can indeed operate this way, says Tobin, they then "become a perfect mechanism for corporate influence in campaigns and also fundamentally destroy the few checks that are left on the corruptive influence of large contributions in political campaigns."

But, and it's a bit but, are the assumptions made by the tax-exempt groups correct?

According to Tobin, no: "In most cases, the (c)(4)s formed to engage in independent advocacy are not complying with the law."

Real-life, however, has seemed to make them seem quite clever. They have been getting away with their improper political activities because the IRS is both underfunded and unequipped to handle large-scale regulation in this area, says Tobin.

So that makes these groups clever, but only in the regard that they've so far been able to get away with political advocacy.

"But if their point is that they have found a legal way to engage in secret campaign advocacy, they are wrong, on both moral and legal grounds," says the law professor.

And if the abuse isn't stopped, says Tobin, "then there will be no check on the corruptive influence of large campaign contribution and our democracy will surely suffer."

Here's hoping that this "cleverness" is indeed short-lived.

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